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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

NONCONSTANT GROWTH Carnes Cosmetics Co.’s stock price is $30, and it recently paid a $1.00 dividend. This dividend is expected to grow by 30% for the next 3 years, then grow forever at a constant rate, g; and rs = 9%. At what constant rate is the stock expected to grow after Year 3?

Summary Introduction

To determine: The constant rate that stocks are expected to grow after 3 years.

Introduction:

Horizon Value:

It is the present value of all cash inflows and outflows that are likely to occur at a future date with g constant growth rate after that date. The time period up to which the company has non-constant growth rate is known as the horizon date.

Explanation

Given information:

Non-constant growth rate for 3 years is 30%.

Dividend paid is $1.

Current stock price is$30.

Required rate is 9%.

The formula to calculate present value is:

P0=D1(1+rs)+D2(1+rs)2+D3(1+rs)3+D3(1+gn)rsg(1+rs)4=D1(1+rs)+D1(1+gs)(1+rs)22+D1(1+gs)3(1+rs)3+D1(1+gs)3(1+gn)rsgn(1+rs)3

Substitute $30 for P0 , 0.30 for gs $1 for D1 and 0.09 for rs in above formula.

$30=$1(1+0.30)(1+0

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